Interpac Business and Migration Solutions Melbourne Australia

(April 14,2010)

PLANS in the US and Europe to set up systemic risk watchdogs will not be effective to prevent another financial crisis, the International Monetary Fund has warned.

In excerpts from its Global Financial Stability Report, the IMF said that the regulators' own behaviour needed to be controlled strictly. The division chief of the IMF's monetary and capital markets department, Laura Kodres, urged world leaders who will attend next week's annual joint meeting of the IMF, the World Bank and the G20 in Washington to focus on co-ordinated plans for financial reform.

IMF pointed out that details on many of the new regulatory proposals were lacking, with countries at different levels of progress on implementing reforms, although governments have spent more than a year working on ways to prevent another crisis. It is concerned that if some countries pull far ahead of others, companies will exercise regulatory arbitrage.

The US has been particularly focused on the issue of too-big-to-fail, in which financial problems in one company ripple through connected businesses. Europe, the UK and the US have announced proposals for systemic risk regulators that would monitor companies likely to become too big to fail. But the IMF said that politicians also needed to create rules for identifying precisely a company's systemic importance. Without a specific measure, regulators would be tempted to allow companies to grow too large or important.

The US Senate is about to start discussing its Financial Reform Bill. In an opinion piece for The Washington Post, Timothy Geithner, the Treasury Secretary, urged politicians to produce legislation that strictly sets out the rules for regulation. "We cannot build a system that depends on the wisdom and judgment of future regulators," he wrote.

The US was reminded of the price of light regulation, when Kerry Killinger, the former chairman and chief executive of Washington Mutual, testified at a congressional committee hearing.

WaMu was bought for $US1.9 billion by JPMorgan Chase in September 2008 after making huge losses on low-quality mortgages. Mr Killinger accused the government and regulators of denying WaMu the aid offered to Wall Street banks during the crisis. " For those that were part of the inner circle and were 'too clubby to fail', the benefits were obvious," he said. "For those outside the club, the penalty was severe." However, James Vanasek, WaMu's former chief credit and risk officer, said that the bank's loan managers rebuffed his repeated requests to improve their lending standards, and that Mr Killinger would not step in to resolve the arguments.

(Source from: Business with the Wallstreet Journal)